ASUNCION, Dec 26 (Reuters) - Paraguayan President Horacio Cartes vetoed the country’s 2017 budget on Monday, an unprecedented decision taken to avoid the risk of default after the Senate placed a limit on the amount of debt the government could issue.

The veto means the 2016 budget will remain in place for the coming year. Congress could still override the veto, but the opposition lacks the two-thirds majority in both chambers that would require.

In a letter sent to Congress on Monday, the government said it decided to veto the budget because the debt limit would generate “a risk to the ability of the state to comply with its obligations.”

“This has not been a simple decision,” Finance Minister Santiago Pena wrote. “We have evaluated all the alternatives, but ... the changes they have made place fundamental elements of the proper functioning of the economy at risk.”

The Senate restricted the amount of bonds the government could issue to $349 million, well below the $558 million proposed. The move would have slashed the amount of money the government could have raised to pay off existing debt, lowering it to $132 million from the $305 million proposed.

With the veto, salary increases that had been approved for teachers and health workers will not go into affect. Pena said such measures did not take into account Paraguay’s so-called fiscal responsibility law, which mandates a maximum fiscal deficit of 1.5 percent of gross domestic product.

The tiny South American nation has issued $1.88 billion in international bonds under Cartes, a former business magnate of the center-right Colorado party.

The veto comes amid a fight between Cartes, members of his own party and the opposition ahead of the next election in 2018 over a proposed constitutional amendment that would allow presidents to seek a second term.

“This is a political failure and the executive has demonstrated his inability to have a dialogue,” said opposition senator Hugo Richer.

“The problem at root is that we have to discuss that we’re going to continue to indebt ourselves due to the inability of the executive power to collect more taxes.”

Paraguay’s central bank has forecast economic growth of 4 percent in 2017, with an inflation rate also around 4 percent. (Reporting by Daniela Desantis; Writing by Luc Cohen and Gram Slattery; Editing by Jonathan Oatis and Leslie Adler)